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re: capital gains taxes on mutual funds

in PETE's reply, he suggests that you can increase your basis in mutual funds for annual capital gain distributions "as long as you have elected to reinvest those dividends in additional shares."

to expand on this a bit... mutual funds pay dividends each year AND they "distribute" their capital gains directly to the funds owners. This "distribution" of capital gains almost always is "on paper" only & rarely, if ever, represents an actual CASH distribution. Thus, there is NO cash to reinvest with respect to annual mutual fund distributions of capital gains. Mutual funds MUST either distribute their capital gains to the fund owners (on paper - for tax purposes only!) OR PAY THE CAPITAL GAINS TAX THEMSELVES! an rather unlikely outcome!

In computing gain or loss on your SALE of mutual funds, ALWAYS add in the annual capital gains distributions (see each year's Form 1099 from the fund) when computing your basis in the fund. If you have reinvested ordinary dividends, then you also add back the ordinary dividend income. But the annual capital gains from the funds (the result of those very happy brokers churning & churning, earning & earning!) are almost ALWAYS added back to your basis.

As for it being "hard" to sell long-held mutual dogs, how tough is it to pick up the phone and say that magic four letter word "SELL"? Take the proceeds & plop them into the S&P500 Index fund of your choice (Vanguard, Schwab, etc.) & voila! - instant market returns, no hassle, no sweat!

Hope this helps.

Dale, a Foolish CPA
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